Carbon is the common denominator in all polluting gases that cause global warming. Carbon dioxide is the gas most commonly thought of as a greenhouse gas. It is responsible for about half of the atmospheric heat retained by trace gasses. It is produced primarily by burning of fossils fuels and deforestation accompanied by burning and bio-degradation of biomass.

It is estimated that if the CO2 increases in the atmosphere at the present rate and no positive efforts are pursued, the level of CO2 in the atmosphere would go up to 800-1000 ppm by the end of current century. Which may create havoc for all living creatures on earth.

The Intergovernmental Panel on Climate Change (IPCC) have predicted that unless emissions of greenhouse gases decrease there will be a temperature increase of between 1.4oC and 5.8oC by 2100.

Carbon trading

The idea behind carbon trading is quite similar to the trading of securities or commodities in a marketplace. Carbon would be given an economic value, allowing people, companies or nations to trade it. If a nation bought carbon, it would be buying the rights to burn it, and a nation selling carbon would be giving up its rights to burn it.

A market would be created to facilitate the buying and selling of the rights to emit this greenhouse gas. The industrialized nations for which reducing emissions is a daunting task could buy the emission rights from another nation whose industries do not produce as much of these gases.

Background – UNFCCC and Kyoto Protocol

UN Framework Convention on Climate Change (UNFCCC)

The United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) established the Intergovernmental Panel on Climate Change (IPCC) in 1988. Its role is to assess a range of information relevant for the understanding of the risk of human-induced climate change.

The UN Framework Convention on Climate Change (UNFCCC) is one of a series of international agreements and treaties on global environmental issues that were adopted at the 1992 Earth Summit at Rio. It provides the overall policy framework for addressing the climate change issue and so forms the foundation of global efforts to combat global warming.

The ultimate goal of the UNFCCC is: ‘Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic human induced interference with the climate system.’

Kyoto Protocol

Kyoto Protocol is an agreement on global warming made under the United Nations Conference on Climate Change in Kyoto, Japan, in 1997. As of September 2006, a total of 163 countries have ratified the agreement (representing over 61.6% of emissions from Annex I countries).

The 1997 Kyoto Protocol of framework of UNFCCC is a key step towards the mitigation of climate change due to increased greenhouse gases accumulation in atmosphere. It was the first international agreement, which legally binds, developed nation to reduce worldwide emissions of greenhouse gases from these countries.

The Kyoto agreement encourages rich nations to cut greenhouse gas emissions by an average of 5.2% below their 1990 levels over the next decade i.e.; by 2008-12.

Annex & Non- Annex Countries

The UNFCCC divides countries into two main groups. A total of 65 industrialized countries are currently listed as Annex countries, including the relatively wealthy industrialized developed countries such as United States of America, United Kingdom, Japan, New Zealand, Canada, Australia, Austria, Spain, France, Germany etc.

They had agreed to reduce their emissions (particularly carbon dioxide) to target levels below their 1990 emissions levels. If they cannot do so, they must buy emission credits from developing countries or invest in conservation.

All other countries not listed in the Convention’s Annexes, mostly the developing countries, such as India, Srilanka, Afghanistan, China, Brazil, Iran, Kenya, Kuwait, Malaysia, Pakistan, Philippines, Saudi Arabia, Singapore, South Africa, UAE are known as non-Annex-I countries. They have no immediate restrictions under the UNFCCC. They currently number 145.

Kyoto Mechanisms:

Under this system, the amount to which an Annex I Party must reduce its emissions over the five year commitment period (known as its “assigned amount”) is divided into units each equal to one tonne of carbon dioxide equivalent.

This assigned amount (Assigned Amount Units (AAUs)) is the total amount of greenhouse gas that each Annex B country is allowed to emit during the first commitment period of the Kyoto Protocol. An Assigned Amount Unit (AAU) is a tradable unit of 1 tone CO2-e.

The three Kyoto mechanisms are:

Joint Implementation

Clean Development Mechanism

Emissions Trading

1. Joint Implementation (JI)

Under Joint Implementation, an Annex I Party may implement an emission-reducing project or a project that enhances removals by sinks in the territory of another Annex I Party and count the resulting emission reduction units (ERUs) towards meeting its own Kyoto target.

2. The Clean Development Mechanism

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialized countries with a greenhouse gas reduction commitment, to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower.

The developed country would be given credits (Carbon Credits) for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project.

Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which causes global warming. Carbon credits are measured in units of certified emission reductions (CERs). Each CER is equivalent to one tonne of carbon dioxide reduction.

3. Emissions Trading

Under this mechanism, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.

Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from developing countries. i.e. Countries/companies with high internal emission reduction costs would be expected to buy certificates from countries/companies with low internal emission reduction costs.

Principles of Kyoto Protocols

At its heart, Kyoto establishes the following principles:

Kyoto is underwritten by governments and is governed by global legislation enacted under the UN’s aegis.

Governments are separated into two general categories: developed countries, referred to as Annex countries (who have accepted GHG emission reduction obligations); and developing countries, referred to as Non-Annex countries (who have no GHG emission reduction obligations).

Any Annex country that fails to meet its Kyoto target will be penalized by having its reduction targets decreased by 30% in the next period.

By 2008-2012, Annex 1 countries have to reduce their GHG emissions by around 5% below their 1990. Reduction targets expire in 2013.

Kyoto includes "flexible mechanisms" which allow Annex economies to meet their GHG targets by purchasing GHG emission reductions from elsewhere. These can be bought either from financial or from projects which reduce emissions in non-Annex economies under the Clean Development Mechanism (CDM), or in other Annex countries under the JI.

Carbon Trading in India

India is expected to capture between 20 and 30 per cent of the CDM market, bringing in up to $300 million in revenue.

Several favorable enabling factors have contributed to India’s pre-eminent position in the CDM market such as a good technical base and a pro-active National CDM authority, which includes secretaries from ministries such as finance, non-conventional energy sources and power.

The Ministry of Environment and Forests deals with the climate change and CDM issues in India. Over the eighteen-month period from January 2004 to June 2005, 80 projects were approved by the National CDM Authority, far more than in any other country, during the same period.

Of these 80 projects, 44 are in renewable energy, 25 in energy efficiency, 5 each in fuel switching and industrial processes, and 1 in municipal solid waste. These projects are then submitted to the UNFCCC’s Executive Board for validation and registration.